Insurtech investments continue despite recent turmoil in financial markets as high-profile companies in the sector such as Lemonade Insurance Co. come to market and funding activity moves forward.
While the COVID-19 pandemic did cause some insurtech investors to pause and regroup, the sector has not been derailed, sources say.
Some insurers, however, are moving financial resources to traditional underwriting to ride the rising market, they say.
Willis Towers Watson PLC released a report in May showing that while overall insurtech funding was down 54% in this year’s first quarter, deal count was up some 10%.
When insurtech first became a buzzword, senior management at conventional insurers felt compelled to invest in the burgeoning sector, some of which was “misguided,” said Dogan Kaleli, New York-based co-chair, global facilities/programs practice group, and head of programs business, North America for Allianz Global Corporate and Specialty, a unit of Allianz SE.
It was “not a mature decision-making process,” but it has evolved to include better due diligence and a more thoughtful process, he said.
“The result of that process has been more deals and lower dollar amounts. It’s a sign investors are getting smarter,” Mr. Kaleli said.
“The pattern is similar whenever you have a wave of disruption and innovation,” said Marie Carr, principal of global growth strategy and U.S. financial services practice in Chicago for PricewaterhouseCoopers LLP. She compared the rise of insurtech to the dot-com era of the late 1990s, when businesses “got funding which shouldn’t have. That’s all part of the learning curve.”
Mr. Kaleli said investors want to ensure insurtechs have minimum funding to prove their business models before moving on to later funding rounds. “Investors want to invest in proven business models,” he said.
Amelia Gandara, senior investment professional in Columbus, Ohio, with Nationwide Mutual Insurance Co.’s venture capital team, said insurtech investment activity slowed as the COVID-19 pandemic became more acute. “All funds, we had to react when COVID-19 hit. We all had to look at our own portfolio, so that a slowdown occurred in the venture ecosystem.”
Nationwide’s venture capital team, however, did not pause long and has an insurtech deal in the pipeline it hopes to close in the next few weeks, Ms. Gandara said. The team manages a fund of some $100 million and typically makes investments of $1 million to $5 million in early stage funding rounds.
Despite the pause and the tumult gripping markets in the wake of the pandemic outbreak, “capital availability is still good,” said Martha Notaras, managing partner at Brewer Lane Management LLC in Los Angeles.
Ms. Notaras said there is still “real appetite for quality deals from traditional venture capitalists,” with solid management experience and capability. “The market continues to believe in insurtech,” she said.
The initial public offering of Lemonade, which raised $319 million, could serve as a bellwether for the wider insurtech sector, sources said. The startup had previously raised $300 million from investors, including insurers Axa XL, a unit of Axa SA, and Allianz.
“The Lemonade IPO is an important touch point,” for the insurtech sector, said Andrew Lerner, managing partner of investment firm IA Capital Group Inc. “If that goes well, I think it helps the whole sector,” he said. But the converse could also be true, he added.
In late June, Planck Resolution Ltd., founded in 2016, raised $16 million in series B funding, bringing its total investment amount to $28 million. The investment round was led by Team8 Capital and included new strategic investor Nationwide Mutual.
Also in June, cybersecurity risk management startup Axio Global Inc., founded in 2013, raised an undisclosed amount in a series A1 round. The investment round was led by Fin Venture Capital and IA Capital Group and included previous investor NFP Ventures.
While insurtech firms continue to draw funding, some insurers have redeployed capital back into underwriting as rates in many commercial lines continue to rise.
“What you’re seeing right now is a shift in capital across the industry, from technology into the actual balance sheet,” said J. Paul Newsome Jr., Chicago-based managing director at investment brokerage Piper Sandler Cos.
“What I’m seeing now is a lot of people working on the formation of companies,” or recapitalizing others, “to try to position themselves to benefit from a hard market,” he said. “They think they can make better returns on traditional business because of the rate environment.”
Some insurance companies may “reach a point where they feel they need to focus on the core of their business,” Ms. Notaras said.
The COVID-19 outbreak has also catalyzed change at insurers, Mr. Newsome said.
“Every time you have an event of this magnitude, it really changes how you think about underwriting and the perception of risk,” Mr. Newsome said. Together with rising loss cost trends, pandemic-related losses, and financial markets-related losses, “all these together drive capital into the normal core of the business,” he said.
“I think insurtech is going to be around; it may just have to go through its first good business cycle downturn,” Ms. Carr said. “I’m not surprised that there’s a lot of money and activity that seems to be paused and on the sidelines, but I think going forward, digital is here to stay.”
